POSaBIT Systems Corporation (PBIT) Earnings Call Transcript & Summary

Good day, and welcome to the POSaBIT Systems Corporation Third Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. It's now my pleasure to turn the floor over to your host, Oscar Dahl. The floor is yours.

Thank you, operator. With me on this call are Ryan Hamlin, Chief Executive Officer; and Chelsea Bolander, POSaBIT's Corporate Controller. I would like to begin the call by reading the safe harbor statement. This statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call, with the exception of historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the company's annual report and subsequent filed reports as well as in other reports that the company files from time to time with SEDAR. Any forward-looking statements included in this call are made only at the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances. The company will also be citing adjusted EBITDA, adjusted revenue and adjusted gross profit in today's discussion. Adjusted revenue, adjusted gross profit and adjusted EBITDA are non-IFRS measures used by management that do not have any prescribed meaning by IFRS and may not be comparable to similar measures presented by other companies. The company defines adjusted revenue as gross revenue minus license support revenue, plus actual licensing cash received as part of positives licensing deals. The company defines adjusted gross profit as adjusted revenue less company cost of goods sold. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization and further adjusted to remove changes in fair values and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes these non-IFRS measures are useful metrics to evaluate its core operating performance and use these measures to provide shareholders and others with supplemental material of its -- supplemental measures of its operating performance. The company also believes that securities analysts, investors and other interested parties frequently use these non-IFRS measures in the evaluation of companies, many of which present similar metrics when reporting their results. We caution adjusted revenue, adjusted gross profit and adjusted EBITDA are not substitutes for gross revenue, gross profit or profit loss, respectively. Now I'd like to turn the call over to Ryan Hamlin, Chief Executive Officer. Ryan, please proceed.

Thanks, Oscar, and welcome, everyone, to the call today. As a reminder, all numbers that we'll be talking about today are in U.S. dollars. During our Q2 earnings call, we announced that we had finished the quarter with both positive free cash flow and positive adjusted EBITDA. I'm pleased to announce that it continued again in Q3. We ended the quarter with both free cash flow and positive adjusted EBITDA. Amid all the uncertainty in this industry, this remains a significant accomplishment for our company and an indication of how we are building a solid base of operations now and for our future. As I mentioned, we grew our adjusted EBITDA quarter-over-quarter from $96,000 in Q2 to $148,000 in Q3, a 53% increase quarter-over-quarter. This is another significant development as we continue to right the ship after a volatile past 18 months in the cannabis industry. In our last call, we mentioned the launch of the new beta version of our POSaBIT eComm and menu product. We exited our beta period in Q3 and have fully launched our 1.0 eComm and menu service. We are on track for our goal of having approximately 50 merchants up and running by the end of this year and plan to have over 200 by the end of next year. I do not want to understate how important this is for us. We now have a viable menu platform for our point-of-sale merchants that will compete with the other major players in this space and level the playing field for POSaBIT in a significant way. We expect this business to add over $1 million in new revenue with great margins in the 70% range over the next 12 to 18 months. In addition to the incremental revenue it will bring in, it also further strengthens our Point-of-Sale business and makes the Point-of-Sale even more sticky to our customer base. Another new product we mentioned earlier this year is POSaBIT Pay, our Venmo-like ACH payment option. It continues to grow in the market, especially with stores who are using our new eComm menu. We added 40 new stores in the platform in Q3 and expect significant growth throughout the remainder of '24 and into 2025. The ability to pay online for an order is a big plus for our consumers, especially for merchants in states that offer home delivery services. Now I want to circle back to our financials. I want to make one thing very clear. We have focused the last 12 months on getting financially stable and healthy. We are laser-focused on growing our gross margin dollars or gross margin percent and adjusted EBITDA profitability, and the numbers are now starting to bear that out. I urge you to look at our adjusted gross profit margin and adjusted EBITDA even more than other metrics. As I have stated previously, we do not recognize the full impact of the cash we receive from our long-term Point-of-Sale licensing deal as revenue. This is cash we receive monthly and will continue to receive monthly for the foreseeable future. Because of our increase in positive cash flow this quarter, we were able to pay off a significant amount of our aged payables and settle a lawsuit for $350,000 during Q3 while still maintaining nearly the same amount of cash in the bank at the end of the quarter. We are pleased to have settled the lawsuit and view this as a positive outcome to help reduce our ongoing legal expenses, which have been very significant over the last 12 to 18 months. Our adjusted gross profit margin and adjusted EBITDA also included a onetime adjustment to account for a portion of agent revenue sharing that was recognized fully in Q3 for revenues that actually occurred in Q1 and Q2. This was an incremental hit of approximately $180,000 that lowered our gross margin this quarter that would have otherwise not been included. Now let's talk a little bit about our Point-of-Sale growth. We had another outstanding quarter for our Point-of-Sale product, increasing the number of Point-of-Sale merchants by 33% from the same quarter last year. Point-of-Sale market share is a great way to gauge our future potential as it relates to payment processing. As an example, we're on track to process over $1.5 billion in cannabis sales through our Point-of-Sale in 2025. In an industry where we are able to provide true merchant services to our customers in the form of credit card processing, we will process over 85% of those sales through our merchant services. Given our current margins, that will result in another $20 million in gross margin dollars. So you can see why it is so important for us to keep growing our Point-of-Sale base. We believe the day is coming soon that we'll be able to monetize this base for our payments. In fact, the work to reschedule cannabis to Schedule 3 drug continues to make progress, and we believe there will be a serious push to make that happen in 2025. This is why POSaBIT has already invested in the infrastructure and processor relationships to support full cannabis credit card processing. With that, I will now turn the call over to Chelsea Bolander, our Corporate Controller, for a more detailed review of our quarterly financial results.

Thank you, Ryan. Total revenue was $4.1 million in the third quarter of 2024, down 5% compared to $4.3 million in the prior quarter. Adjusted revenue was $5 million in the third quarter of 2024, consistent with the prior quarter. We define adjusted revenue as gross revenue, as reported, minus license support revenue, plus actual cash received in the current period asset receivable for the licensing contract. Adjusted gross profit was $2.7 million for the third quarter of 2024 or 54% of adjusted revenue. This is compared to an adjusted gross profit of $3 million in the prior quarter or 59% of adjusted revenue. Adjusted EBITDA was a profit of approximately $148,000 in third quarter of 2024 compared to an adjusted EBITDA profit of $97,000 in the prior quarter. Gross profit, as reported, in the current quarter was approximately $1.6 million or 40% of revenue compared with $2.2 million or 51% of revenue in the prior quarter. The decrease in gross margin percent compared to the prior quarter is primarily the result of a channel partner revenue sharing payment applicable to prior periods but recognized in full in the current period. Operating expenses were $3.4 million in the third quarter of 2024 compared to $2.8 million in the prior quarter. The primary drivers of the increase in operating expenses were administrative expenses. Administrative expenses were $2.4 million in the third quarter of 2024. The largest driver of administrative expenses are people costs. These were $2 million in the third quarter compared to $1.7 million in the prior quarter. The increase quarter-over-quarter is primarily driven by an increase in employee expenses. Net loss was approximately $2.1 million for the third quarter of 2024. This compares with the net loss of $7.7 million in the third quarter of 2023 and the net loss last quarter of $454,000. Cash on hand at September 30 was approximately $908,000. This compares to $1.1 million as of June 30, 2024. Our debt balance remains low at $4.5 million of debt, consisting of an SBA loan and a 5-year term loan payable in 2028. With that, I'll turn the call back to you, Ryan, for closing remarks.

Thanks, Chelsea. I wanted to just kind of focus the last comments here on -- as we finish the year, and then we'll go into some Q&. A. But our focus in '25 is really clear. We're going to continue to grow our cash in the bank, maintain adjusted EBITDA profitability and continue a consistent and moderate rate of growth across all of our different business lines. We're in it for the long haul. We are solidifying all facets of our operations. We believe that POSaBIT is one of the healthiest companies in the cannabis industry right now, given our growth, our suite of products and our current cash flow. Lastly, before we jump into Q&A, I've been asked this a couple of times, I want to briefly touch on the recent election and what that's meant for us and the industry at large. There's all sorts of speculation right now, but unfortunately, we're not going to know until we know. We don't think full federal legalization of cannabis is coming anytime soon, but we are preparing for all short and long-term outcomes. Like I already mentioned above, we're really optimistic that some form of rescheduling or safe banking will occur in 2025. Both political parties seem to have at least some consensus or some -- the same consensus on that fact. Trump has even been on the record in September as being in favor of rescheduling, but we'll see where things end up as we go into the new year. Regardless, we already and expect some positive news as it relates to credit card processing for cannabis in 2025. All right. We're going to jump into the Q&A portion of the call. In our press announcement, we asked people to submit questions ahead of time to [email protected]. This is the same format we've used in the past, and it's worked really well. At the end of those questions that were sent in, we'll open up the phone lines if there's any further questions. As always, you can e-mail us at [email protected], and we will follow up with you after the call. So I've asked Oscar to go ahead and ask the questions that came in from our investors via e-mail.

All right. First question, Ryan, it looks like revenue and gross margin are down slightly in Q3 versus Q2. Why?

Yes. No, it's true. If you look kind of at our quarter-over-quarter, we did definitely dip down slightly. The biggest reason was a onetime hit to our COGS in the form of some revenue recognition that we didn't do in Q1 and Q2 for a revenue share that we did with an agent, and that was about $180,000. So if you look at the difference, that makes up a big chunk of the difference between Q2 and Q3. The other is we just had a little bit less Payment revenue in Q2. And Q2 tends to be a nice quarter for us because it includes, obviously, the big 420 holiday, and that's always a big month. And so we were a little bit below, but again, a lot of the offset, particularly in the gross margin was due to the increase of the $200,000 in COGS. And on the flip side of that, if you look at our POS revenue, it increased nicely, which is great. So our POS revenue will continue to grow as we add more and more merchants.

All right. Next, Ryan, can you talk a little more about the reason cash actually went down by $200,000 in Q3 versus Q2, but yet you were saying you were cash flow positive in Q3?

Yes. Yes, I know it looks a little odd. When you look at just the numbers, I guess what we want to do is we want to measure ourselves based on the expenses that occurred during the quarter. So we have some outstanding aged payables over the last 120 days or so that we've really put a concerted effort on the payoff. And so that's the good thing is when you're healthy and you are starting to put cash away, you can really pay off any sort of outstanding debt. So we definitely paid off some outstanding debt. We also had some onetime expenses that we haven't had in the past in the Q3 quarter. Specifically, we had to prepay for our 2024 auditor a significant chunk of that. So that was an expense that hit in Q3 that obviously -- that's part of our '24 audit process. So we'll keep looking at the -- we don't expect this to be the norm. This is kind of a bit of one-off where we just had to pay and spend a little bit more cash than we normally would in a given quarter.

All right, next question. If 280E comes to an end, how will that impact the company?

Good question. I think that one just came in on the e-mail. 280E is ability for people to take the federal tax breaks off of their expenses and be able to deduct that. For us, it's not a huge change personally for the business, but what it does change is it changes all of our customers. So you have a bunch of our merchants today that can't deduct any of the costs, for example, for paying for our software, the -- to run their business. That would be typically a deduction. Same thing with the payment fees that they would pay, that would be a deduction. So with 280E going away, that's going to free up more capital for all of our merchants, which is a good thing for us because that means it opens up for better opportunities for us to add more customers that may be are a little bit worried about cash flow because of 280E.

All right. And the last question we have, what do you tell an investor who's considering POSaBIT right now?

I mean I think I answered this one every quarter, but we obviously think we're undervalued. I mean if you just look at the company as a whole and our history, I think we've proven over and over that even in difficult times like the cannabis industry has been in, in the last 18, 24 months, not only have we sustained, but we've grown and we've gotten to the point where now we're adjusted EBITDA positive and profitable. So I -- the market is going to dictate it. We -- it's frustrating as there's a lot of smaller traders and day traders, and that's just the nature of the CSC and the OTC. And we're obviously super bullish on our future. We're optimistic about the cannabis industry as a whole. It's not going anywhere. We're just going to see more and more adoption. And like I just talked about, we're excited for the strong potential of rescheduling to happen. And when that happens, that's certainly going to be very good for us as a company. So I guess with that, we'll turn it over if there's any questions online. I'll turn it back to the operator.

[Operator Instructions] Okay. It looks like we have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

Yes. Thanks, everyone, for joining the call today. We appreciate it and hope everybody has a great Thanksgiving, great holidays.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.